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Electrolux Profit Drops; Texas Factory to Be Closed

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Electrolux AB, the world's largest maker of household appliances, said second-quarter profit fell 25 percent because of costs to move production abroad. The company, maker of Eureka vacuum cleaners, will close another factory as steel prices rise.

Net income dropped to 1.21 billion kronor ($162 million), or 3.95 kronor a share, from 1.6 billion kronor, or 5.10 kronor a share, a year earlier, the Stockholm-based maker of Frigidaire refrigerators said. Revenue fell 4.1 percent to 31.9 billion kronor from 33.3 billion, a 10th straight quarterly decline.

Chief Executive Hans Straaberg, 47, is cutting jobs and moving production to lower-cost countries including Mexico and Hungary amid pricing competition from Maytag Corp. and Whirlpool Corp. Electrolux said today it will restructure its business in Australia and shut a vacuum-cleaner plant in Texas, affecting 850 jobs. The company also may close an oven factory in France.

``There are further restructuring programs and costs,'' said Henrik Schultz, an analyst at Danske Securities in Copenhagen who gives Electrolux stock a ``hold'' recommendation. ``It is likely that I will have to reduce my estimates for the year.''

The shares fell 6 kronor, or 4.3 percent, to a 15-month low of 135 kronor at 12:33 a.m. in Stockholm. They have shed 21 percent in the past year. Whirlpool has fallen 3.1 percent slip, and Maytag has declined 13 percent.

Electrolux had one-time costs of 406 million kronor as it paid to shift production of vacuum cleaners from Sweden to Hungary. The company also paid $30 million to settle a lawsuit with John North regarding trade secrets of some upright, cyclonic vacuum cleaners. The plaintiff has agreed to drop all claims and the right to future claims.

Steel Prices

Operating income excluding items affecting comparability will drop ``in the area of less than 10 percent'' this year, Straaberg said in an interview. Higher steel costs may have an ``increasingly negative impact'' on second-half income, he said, declining to quantify the effect. Electrolux doesn't have further plans to close factories or transfer production this year, he said.

Electrolux, which also makes Husqvarna chainsaws, said it will raise prices as it introduces new products and continue to cut costs to protect profit margins. Sales have dropped because of gains by the krona against the dollar and divestments of units. Electrolux's operating income drops about 400 million kronor on an annual basis for every 1-krona gain against the dollar.

The Texas factory closing will cost 150 million kronor and the Australia restructuring will cost 250 million kronor in the second half of the year. The company is increasing the share of purchases of components from low-cost countries to about 27 percent this year from 20 percent in 2003, Electrolux said.

Electrolux didn't say whether the Texas workers would be fired or moved to another plant.

Good Execution

The restructuring, while costly, is necessary, some analysts said. ``They do everything exactly right, and I think their execution is good,'' Schultz said.

Maytag, the third-largest U.S. appliance maker, cited higher materials costs as well as lower-than-expected sales when it said last month that the company would cut about a fifth of its salaried workers and miss profit forecasts. Like Electrolux, Maytag is shedding jobs and moving production to countries where costs are lower in an effort to boost profit.

Electrolux in May said it would move production of vacuum cleaners, including the robotic Trilobite, from Sweden to Hungary to save about 150 million kronor a year. The move will cost about 200 million kronor, 167 million kronor of which the company took in the quarter.

The company may close an oven factory in France that employs about 240 people. Such a move would costs about 350 million kronor, according to Electrolux, which had almost 75,000 employees worldwide at the end of last year.

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Electrolux aims to devote about 2 percent of sales to marketing and investment in innovation to help it compete. U.S. kitchen-appliance prices have fallen 3 percent to 4 percent this year, according to Goldman, Sachs & Co. Shipments have increased by an average 8.2 percent in the first five months of this year, causing some concern that they will slow in the second half, Goldman has said.

Electrolux spent an extra 225 million kronor on marketing in the first half as it introduced its Icon line in the U.S. The kitchen line, which Electrolux is billing as ``European'' for the American market, includes items such as built-in ovens with doors that don't get hot and stainless-steel refrigerators that don't get smudged by fingerprints.

Such moves will help the company increase prices. ``We are emphasizing profitability over share this year,'' Straaberg said. ``We expect to grow with the market. It takes some time to trim the sales, but we don't expect to lose market share.''

Branding

The company aims to sell as much as 70 percent of its products under the Electrolux brand by 2007 and will spend ``several billion kronor'' in the next three years on branding and introducing higher-priced goods including the Auto Mower, a machine that can mow lawns on its own. By the end of this year, about 60 percent of all its appliances sold in Europe will carry the Electrolux brand.

Electrolux's origins date back to 1910, when Swedish salesman Axel Wenner-Gren saw an American-made vacuum cleaner in a Viennese store window and got the idea to sell the cleaners door-to-door using a technique he learned in the U.S. By the 1920s, he even secured the blessing of Pope Pius XI to vacuum the Vatican for a year.

Straaberg declined to comment on press reports that the company may buy the electrical tools unit of Atlas Copco AB. ``Acquisitions are something we constantly look at,'' Straaberg said, adding that he wouldn't exclude expanding in any of the businesses where Electrolux currently operates.

Electrolux makes products ranging from diamond-tools cutters to Weed Eaters to talking washing machines.

From Bloomberg

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